The Formula to Determine the Materials to Be Purchased is

The Formula to Determine the Materials to Be Purchased is

Valuation of Materials: Definition

One of the main objectives of cost accounting is to ascertain accurate costs. Accuracy of costs depends upon knowing the cost of materials consumed and the labor used to produce a particular product.

Textile is the most important chemical element of cost. For this reason, it should be valued and charged to cost units properly.

Valuation of materials tin can be studied from two principal vantage points:

  • Valuation of materials purchased/received
  • Valuation of materials issued

Valuation of Materials Purchased/Received

The valuation of the materials received/purchased is made based on the actual cost, which consists of the post-obit:

  1. The purchase price (or invoice price) charged past the supplier (less the merchandise discount, if whatsoever, immune)
  2. Taxes, duties, packing, freight, carriage & cartage, transit insurance, and octroi paid and charged past the supplier or directly paid by the purchaser
  3. Expenses on purchasing, receiving, inspecting, and storing materials

The expenses nether (three) above are, of course, incurred in connection with materials purchased.

However, from the viewpoint of convenience and practicability, these are not included in the toll of materials purchased just are treated as function of overhead.

In connexion with the calculation of the cost of materials purchased, the following items crave a special mention:

  • Discount
  • Price of containers


Disbelieve may be expressed as a concession or reduction in the invoice price of materials bought that is allowed by the supplier to the buyer or client.

Discount is divided into 3 parts:

(a) Trade Discount:
A reduction of the selling cost (or invoice cost) immune by the seller to the buyer on account of a business custom or usage.

The amount of merchandise discount received by the purchaser is deducted from the invoice price of the materials purchased.

(b) Quantity Discount:
A special concession or reduction of the selling cost allowed by the seller to the buyer on business relationship of majority purchases.

Popular:   You See: a Soccer Ball You Type: Example Answerel Fãºtbol

A quantity discount is offered to encourage majority orders, where the rate varies co-ordinate to the quantity ordered and purchased past the buyer. Quantity discount is also deducted from the invoice price of the materials purchased to calculate their toll.

(c) Cash Discount:
A concession or allowance immune past the creditor (or supplier) to the debtor (or client) on account of ready greenbacks payment or payment before the expiry of the specified credit period.

Cash discount represents involvement on the amount due for the unexpired credit catamenia. Every bit such, cash disbelieve is treated every bit a fiscal item that should not be deducted from the cost of the materials purchased.

Price of Containers

When materials are supplied, suppliers by and large send them in containers. The treatment of the toll of containers involves the post-obit considerations:

Non-returnable containers are not charged separately past the supplier

Consider the instance of materials that are supplied in non-returnable containers for which no carve up charge has been made in the invoice.

In this example, no treatment is needed in respect of containers to calculate the toll of materials. If the containers take some realizable value, this should be estimated and deducted either from the toll of materials or factory overhead.

Not-returnable containers are charged separately by the supplier

If materials have been supplied in non-returnable containers, which take been charged separately and are neither returnable nor possess whatsoever realizable value, their price should be included in the price of materials.

Returnable containers are charged separately by the supplier

If materials have been supplied in returnable containers which have been charged separately and can be returned to the supplier or resold, the difference betwixt their price toll and returnable value should be included in the toll of materials.

Popular:   A Work Order Contains All of the Following Except

If the materials are supplied in returnable containers on which the buyer is to receive credit for the full price charged (by the supplier) on their return, the cost of containers is not included in the cost of materials.

This is based on the presumption that the materials will be returned to the supplier in due form.


Example 1

A manufacturer purchases 5,000 units of fabric Ten — 51 at $fifteen per unit less a trade discount of two% on the invoice toll.

Freight paid was $i,000, wagon & cartage $200, and octroi $750. The expenses for purchasing, receiving, and storing the material for the yr amounted to $five,000.

Determine the price of the cloth per unit.


Calculation of Cost Per Unit


The expenses for purchasing, receiving, and storing are not needed to calculate

 the toll of materials purchased for the purpose of convenience

in bookkeeping.

Example 2

A consignment consisted of ii chemicals A and B. The invoice gave the following data:
Data Example 2

A shortage of 200 kgs. in A and 128 kgs. in B was noticed due to breakages.

What is the stock rate y’all would adopt for pricing bug, assuming a provision of five% toward further deterioration?


Issue Rate Solution

Case 3

The following details are available regarding a consignment of 1,250 kgs. of material 10.

Data Example 3

The toll of containers is $60 per container for 50 kgs. of cloth, while rebate is immune at $xl per container if returned within 6 weeks, which is a normal characteristic.

Ane container load of cloth was rejected on inspection and not accepted.
The cost of unloading and handling was 0.25% of the cost of the materials ultimately accepted.

Based on the to a higher place, decide the landed cost per kg. of fabric Ten.

Popular:   Which of the Following is Not True of Saliva


Landed Cost Calculations

Frequently Asked Questions

What does valuation of material mean?

The concept of valuation ways determining the true value in money (of a transaction) and usually involves several steps: discussion, research, and review. The purpose is to arrive at a figure which has an accurate understanding.

What is the difference between a trading discount and a cash discount?

The main difference is that a trading discount offers some class of incentive, while a cash discount offers an involvement-gratis period.

How are unloading and handling costs treated?

Unloading and handling costs should be treated as a part of the toll of materials purchased.

Why is there a separate treatment for returnable and non-returnable containers?

The basis for this handling arises from the fact that cloth supplied in non-returnable containers cannot be returned to the supplier or resold, while material in returnable containers can be returned to the supplier or resold.

Which is excluded in the valuation of receipt of material?

Expenses incurred in the process of purchasing, receiving and storing materials.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Concern Editing and Writing, contributes to his financial pedagogy site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more nearly True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

  • Facebook
  • LinkedIn
  • Instagram
  • Twitter
  • YouTube

The Formula to Determine the Materials to Be Purchased is